CalPERS considers upping fixed-income investment, lowering volatility

NEW YORK (Reuters) - The California Public Employees’ Retirement System is considering more than doubling its investment in municipal bonds and other fixed-income assets while lowering volatility, according to proposals set for discussion at a workshop on Monday.

The board of directors for CalPERS, the largest U.S. pension fund, with a market value of $342.5 billion, is mulling new investment strategies at a time of low bond yields, high prices and the second-longest bull market in history.

Monday's Asset Liability Management Workshop at CalPERS' Sacramento headquarters is intended to give board members a sense of the potential impact and risk of each plan, spokeswoman Megan White said. No action will be taken at the informational meeting.

Up for review are four portfolios with bond investment allocations ranging from 44 percent to the current 19 percent.

The proposal that would increase bond investments the most would reduce the fund's expected short-term compound return rate to 5.6 percent from 6 percent while reducing volatility to 9.1 percent from 11.5 percent. The long-term expected return would lower to 7.8 percent from 8.1 percent.

To a lesser degree, two of the other portfolios would also raise fixed-income investments.

One plan keeps the asset class at 19 percent while increasing CalPERS' share of global equity to 59 percent from 50 percent. Under that proposal, the expected short-term compound return rate and long-term return rate would rise the most - to 6.4 percent and 8.5 percent, respectively. Expected volatility would also increase the most under that plan to 12.8 percent.

The other portfolios would lower global equity allocations or keep them at current levels.

All portfolios propose to maintain the current 8 percent allocation for private equity and 13 percent allocation for real assets. Under each plan, liquidity would drop to 1 percent from the current 4 percent.

CalPERS has been under increasing pressure to gain returns closer to the fund's assumed rate of return of 7 percent by 2020. The fund has been challenged in part because it is cash negative, paying out more in benefits to retirees each year than it has been collecting in contributions from workers.

The board, which decides on an investment plan every four years, is scheduled to select its next portfolio in December. The new allocations would go into effect on July 1, 2018.